A comprehensive estate plan should achieve a variety of goals above and beyond providing a road map for the division of estate assets after your death. Tax and probate avoidance, incapacity planning, and charitable gifting are just a few of the goals you might wish to achieve with your estate plan. In recent years, the use of trusts to achieve these various goals has increased significantly, due in large part to the versatility of trusts and the numerous advantageous they offer. If you are looking for tax advantages as well as a way to provide for both charitable and non-charitable beneficiaries in your estate plan, a charitable remainder trust might be an excellent addition to your estate plan.
A charitable remainder trust is a tax exempt irrevocable trust that allows you to provide for a loved one first and then make a gift to charity later. In a charitable remainder trust the terms of the trust dictate that distributions will be made to at least one non-charitable beneficiary for a specified period of time, or for life. Once the specified period of time has elapsed, the remainder of the assets held by the trust are then gifted to at least one charitable beneficiary.
By way of illustration, let’s assume that you have $500,000 worth of assets and you wish to provide for your two young adult children as well as gift to the local art museum. You set up the terms of the trust to make annual distributions in the amount of $20,000 to each child for a period of ten years with the remainder to be gifted to the art museum. Under these terms, $40,000 per year will be disbursed out of the trust for ten years, totaling $400,000. Of course, the trust should earn interest if managed properly but will also incur administration fees. Therefore, it is impossible to know exactly how much will ultimately be gifted to the art museum, but someone in the neighborhood of $100,000.
You could also provide for a non-charitable beneficiary for life before the remainder is gifted to a charitable beneficiary. In the previous example, let’s assume that instead of two adult children you wish to provide for a spouse instead. Assume you are both 60 at the time the trust is created. You could include terms that call for an annual distribution of five percent of the value of the trust for life. If the trust is well managed it might earn more than five percent per year, leaving a large percentage of the trust principal untouched when your spouse dies. Regardless of how much is left in the trust, the remainder is only gifted to the art museum when the non-charitable beneficiary, your spouse in this case, dies.
If you think a charitable remainder trust would be a wise addition to your estate plan, consult with your estate planning attorney.
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